IMF admits: we failed to realise the damage austerity would do to Greece

5 June 2013
Last modified on  21 May 2014
Larry ElliottPhillip Inman and Helena Smith in Athens

The International Monetary Fund admitted it had failed to realise the damage austerity would do to Greece as the Washington-based organisation catalogued mistakes made during the bailout of the stricken eurozone country.

IMF chief Christine Lagar IMF chief Christine Lagarde. Greek media recently quoted IMF her describing 2011 as a ‘lost year’, partly because of miscalculations by the EU and IMF.
Photograph: Stephane Mahe/Reuters

In an assessment of the rescue conducted jointly with the European Central Bank(ECB) and the European commission, the IMF said it had been forced to override its normal rules for providing financial assistance in order to put money into Greece.

Fund officials had severe doubts about whether Greece’s debt would be sustainable even after the first bailout was provided in May 2010 and only agreed to the plan because of fears of contagion.

While it succeeded in keeping Greece in the eurozone, the report admitted the bailout included notable failures.

“Market confidence was not restored, the banking system lost 30% of its deposits and the economy encountered a much deeper than expected recession with exceptionally high unemployment.”

In Athens, officials reacted with barely disguised glee to the report, saying it confirmed that the price exacted for the €110bn (£93bn) emergency package was too high for a country beset by massive debts, tax evasion and a large black economy.”

Hitting the poorest the hardest

Under the weight of such measures – applied across the board and hitting the poorest hardest – the economy, they said, was always bound to dive into an economic death spiral.

“For too long they [troika officials] refused to accept that the programme was simply off-target by hiding behind our failure to implement structural reforms,” said one insider. “Now that reforms are being applied they’ve had to accept the bitter truth.”

The IMF said: “The Fund approved an exceptionally large loan to Greece under an stand-by agreement in May 2010 despite having considerable misgivings about Greece’s debt sustainability. The decision required the Fund to depart from its established rules on exceptional access. However, Greece came late to the Fund and the time available to negotiate the programme was short.”

After the biggest bailout, a slump in the Greek economy

But having agreed that there were exceptional circumstances that warranted the biggest bailout in the Fund’s history, officials were taken aback by the much bigger than expected slump in the Greek economy. The country is now in its fifth year of recession and the economy has contracted by 17%. The IMF thought it would contract by just 5.5%.

In the evaluation of the package provided in 2010, the IMF said: “Given the danger of contagion, the report judges the programme to have been a necessity, even though the Fund had misgivings about debt sustainability.

“There was, however, a tension between the need to support Greece and the concern that debt was not sustainable with high probability (a condition for exceptional access).

Making economic projections that were too optimistic

“In response, the exceptional access criterion was amended to lower the bar for debt sustainability in systemic cases. The baseline still showed debt to be sustainable, as is required for all Fund programmes.”

In the event, the report added, the Fund was open to criticism for making economic projections that were too optimistic.”

While the report says a deep recession was unavoidable, it is critical of senior officials in Brussels and European capitals who said Greece would fare better outside the euro. Concerns that Greece could be ejected from the euro and return to the drachma intensified an already febrile situation.

“Confidence was also badly affected by domestic social and political turmoil and talk of a Greek exit from the euro by European policymakers,” it said.

Brussels also struggled to co-ordinate its policies with the ECB in Frankfurt, according to the report.

“The Fund made decisions in a structured fashion, while decision-making in the eurozone spanned heads of state and multiple agencies and was more fragmented.”

Miscalculations of the EU and IMF

The Greek media recently quoted IMF managing director Christine Lagarde describing 2011 as a “lost year” partly because of miscalculations by the EU and IMF.

The authoritative Kathimerini newspaper said the report identified a number of “mistakes” including the failure of creditors to agree to a restructuring of Greece’s debt burden earlier – a failure that had a disastrous effect on its macroeconomic assumptions.

“From what we understand the IMF singles out the EU for criticism in its handling of the problem more than anything else,” said one well-placed official at the Greek finance ministry.

He added: “But acknowledgement of these mistakes will help us. It has already helped cut some slack and it will help us get what we really need which is a haircut on our debt next year.”

Source:  IMF admits: we failed to realise the damage austerity would do to Greece

2 thoughts on “IMF admits: we failed to realise the damage austerity would do to Greece

  1. The word is now out of the horses mouths-the IMF and the EU seriously miscalculated the macroeconomics of the Greek economy.

    According to the IMF ‘s chief, the IMF miscalculated the sustainability of Greece’s debt, the recovery of its economy and the size of the decline of its GDP or the depth of its recession. As it relates to the latter the IMF’s forecast was way off. The IMF’s calculation was that the Greek economy would have declined by 5.5% though it declined by 17%.

    Sadly no IMF officials or economists responsible for these miscalculations were fired. However, the social costs of their miscalculations for the Greek people in terms of lost jobs, underemployment, lost homes , collapsed businesses, suicides, increased poverty, hunger, ill health, child prostitution among many others are as real as the warming of our planet. The miscalculations of the IMF/EU about the efficacy of austerity on the lives of the Greek people particularly the poor could have been avoided with less arrogance on the part of these institutions had they consulted with the representatives of the people such as trade unions, professional bodies and others instead of the German and French bankers.

    So it is indeed appropriate to always question the suitability and technical soundness of the IMF and other unelected bodies that are not accountable to the people like the Greeks who suffer the misery of their “mistakes ” and ” miscalculations” for ever paying in some instances the ultimate price for the errors of the so called economic technocracy.

    I believe that the rare admission of the IMF of its “mistakes” and ” miscalculations” which have resulted in the wrecking of the Greek economy and the lives of millions of its people should embolden the Greek government to wrestle from the IMF/EU significant cuts in its debt, much more flexibility in its debt payment schedule and an end to austerity programs.

    Evidently, the IMF chief’s acknowledgement of her agency’s failure is a good first step in accepting that the fund and the EU have destroyed the Greek economy. As such the next step should logically and justifiably be to adopt measures like those mentioned above to increase jobs and investments back in the Greek economy to put it on a path of growth and development for those in the economy who have suffered most.

    In this context the Greek government should stand firm even if it means leaving the EU which has not been its friend in these trying times. Peace!!

  2. Pingback: Nobel laureate tells TIME that the institutions and countries that have enforced cost-cutting on Greece “have criminal responsibility” | JSC: Jamaicans in Solidarity with Cuba

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